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Oil To Crash Back To $40 If OPEC Fails

OPEC’s increasingly probable failure to reach a production freeze deal will see international oil prices plummet back to US$40 a barrel, according to Goldman Sachs analysts. In a note to clients, the experts went further, cautioning that even if the cartel managed to seal a deal, driven by the bearish prospects in a no-deal scenario, its effectiveness will be at best uncertain.

“The lack of progress on implementing production quotas and the growing discord between OPEC producers suggests a declining probability of reaching a deal on November 30,” the analyst team said, noting that while the negotiations were ongoing, OPEC output in October continued to rise, as did the production of non-OPEC mega producers such as Russia.

These developments have greatly diminished the chances of any production freeze leading to a decline in global crude oil supply and a subsequent increase in oil prices over the next seven months.

This is not the first time Goldman has made a very bearish forecast for oil prices. Last year, the investment bank was the first among its peers to warn that oil prices could slump to US$20 a barrel if the glut continued. This is what almost happened in early February this year, when WTI touched lows of US$26 a barrel. Related: Will Oil Majors Ever Recover?

Although this trough was only touched briefly, it certainly rattled markets, and later in the year, it raised doubts among OPEC’s leading producers as to whether their strategy of fighting shale oil with cheaper output was paying off.

As it turns out, it wasn’t, so Saudi Arabia became the initiator of the September talks about a production freeze that was supposed to draw in non-OPEC producers such as Russia, Brazil, Kazakhstan and Azerbaijan, in order to make the effort meaningful.

Yet, Brazil has declared it has no intention of cutting or even freezing its crude oil production, Russia is playing its cards close to its chest, and, what’s more important, the discord within OPEC is growing. If the internal differences of OPEC members are not ironed out by November 30, there won’t be a deal and oil will plunge to greater depths.